Section 42(d)(5) Federal Grants

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8713]

RIN 1545-AU93

Section 42(d)(5) Federal Grants

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations with respect to

the low-income housing tax credit relating to the application of

section 42(d)(5) to certain rental assistance programs under section

42(g)(2)(B)(i). The regulations clarify that certain types of federal

rental assistance payments do not result in a reduction in the eligible

basis of a low-income housing building. The text of these regulations

also serves as the text of the proposed regulations set forth in the

notice of proposed rulemaking on this subject in the Proposed Rules

section of this issue of the Federal Register.

EFFECTIVE DATE: These regulations are effective January 27, 1997.

FOR FURTHER INFORMATION CONTACT: Christopher J. Wilson (202) 622-3040

(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

Under section 42(d)(1), the eligible basis used to compute the low-

income housing tax credit of a new low-income building is the adjusted

basis of the building as of the close of the first taxable year of the

credit period. Section 42(d)(5) provides that if, during a taxable year

in the compliance period (as defined in section 42(i)(1)), a federal

grant is made with respect to a low-income building or the operation

thereof, the eligible basis of the building for the taxable year and

all succeeding taxable years is reduced to the extent of the federal

grant. Questions have arisen whether rental assistance payments under

section 8 of the United States Housing Act of 1937 (Act) (42 U.S.C.

Sec. 1437f) and certain rental assistance payments under section 9 of

the Act (42 U.S.C. 1437g) are federal grants requiring a reduction in

eligible basis.

The legislative history of section 42 indicates that section

42(d)(5) was enacted to prevent a taxpayer from ``double-dipping'' in

federal benefits. S. Rep. No. 313, 99th Cong., 2d Sess. II-767 (1986),

1986-3 (Vol 3) C.B. 767. This would occur, for example, if the owner of

a building received both the low-income housing credit and a federal-

interest subsidy or federal grant with respect to the building. The

legislative history further indicates, however, that Congress did not

intend to treat federal rental assistance payments as grants for this

purpose. Thus, the legislative history indicates that no basis

reduction is required for rental assistance payments provided by the

Department of Housing and Urban Development (HUD) under section 8 of

the Act. (In contrast to this treatment of section 8 rental assistance

payments, section 42(c)(2) generally denies the low-income housing tax

credit to buildings that receive ``moderate rehabilitation assistance''

under section 8(e)(2) of the Act).

HUD recently was granted the authority to assist mixed-finance

projects under section 9 of the Act. Under this new initiative, public

housing authorities receiving HUD assistance are permitted to disburse

that assistance to private owners as reimbursement for the operating

expenses of units the owner has agreed to maintain for public-housing

tenants. This section 9 assistance for operating expenses functions in

a manner similar to rental assistance payments under section 8 of the

Act. The section 8 rental assistance payments are designed to

compensate the unit owner for all or part of the difference between the

rent a low-income tenant is able to pay and a fair market rent standard

as set by HUD. Similarly, the section 9 payments are designed to cover

an allocable share of operating costs of the units rented to low-income

tenants, thus, in effect, supplementing the rents that these tenants

are required to pay.

Explanation of Provisions

These temporary regulations provide that certain federal rental

assistance payments made to the owner of a building on behalf of low-

income tenants are not federal grants with respect to a building or its

operation that require a reduction in the building's eligible basis

under section 42(d)(5). These payments include rental assistance

payments made under section 8 of the Act, certain payments made under

section 9 of the Act, and payments made under such other programs or

methods of rental assistance as may be designated in the Federal

Register or the Internal Revenue Bulletin.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations and, because these regulations do

not impose on small entities a collection of information requirement,

the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility Analysis is not required. Pursuant

to section 7805(f) of the Internal Revenue Code, this temporary

regulation will be submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Drafting Information

The principal author of these regulations is Christopher J. Wilson,

Office of Assistant Chief Counsel (Passthroughs and Special

Industries). However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

[[Page 3793]]

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.42-16T also issued under 26 U.S.C. 42(n); * * *

Par. 2. Section 1.42-16T is added to read as follows:

Sec. 1.42-16T Eligible basis reduced by federal grants (temporary).

(a) In general. If, during any taxable year of the compliance

period (described in section 42(i)(1)), a grant is made with respect to

any building or the operation thereof and any portion of the grant is

funded with federal funds (whether or not includible in gross income),

the eligible basis of the building for the taxable year and all

succeeding taxable years is reduced by the portion of the grant that is

so funded.

(b) Grants do not include certain rental assistance payments. A

federal rental assistance payment made to a building owner on behalf or

in respect of a tenant is not a grant made with respect to a building

or its operation if the payment is made pursuant to--

(1) Section 8 of the United States Housing Act of 1937;

(2) A qualifying program of rental assistance administered under

section 9 of the United States Housing Act of 1937; or

(3) A program or method of rental assistance as the Secretary may

designate through the Federal Register or in the Internal Revenue

Bulletin (see Sec. 601.601(d)(2) of this chapter).

(c) Qualifying rental assistance program. For purposes of paragraph

(b)(2) of this section, payments are made pursuant to a qualifying

rental assistance program administered under section 9 of the United

State Housing Act of 1937 to the extent that the payments--

(1) Are made to a building owner pursuant to a contract with a

public housing authority with respect to units the owner has agreed to

maintain as public housing units (PH-units) in the building;

(2) Are made with respect to units occupied by public housing

tenants, provided that, for this purpose, units may be considered

occupied during periods of short term vacancy (not to exceed 60 days);

and

(3) Do not exceed the difference between the rents received from a

building's PH-unit tenants and a pro rata portion of the building's

actual operating costs that are reasonably allocable to the PH-units

(based on square footage, number of bedrooms, or similar objective

criteria), and provided that, for this purpose, operating costs do not

include any development costs of a building (including developer's

fees) or the principal or interest of any debt incurred with respect to

any part of the building.

(d) Effective date. This section is effective January 27, 1997.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: January 8, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97-1790 Filed 1-24-97; 8:45 am]

BILLING CODE 4830-01-U